Drug free and aiming for debt free

I just came across your columns and wanted to run my situation past you and get your take. I'm 27 years old with $15,000 in credit card debt and $5,000 in student loans. I haven't made any payment in several years on the credit cards, just pretending they'll eventually be forgotten about. My credit score is now about 530 and these debt negotiation services I know are mostly something I'd be better off negotiating myself. Two questions: First, the hardship I experienced that lead to me racking up my credit cards was drug addiction. Is this something I should not mention or mention differently to the credit companies if I'm attempting to negotiate my debt down? And, since I've burned most credit-providing institutions and have an inferior credit score, is there somewhere I can receive a line of credit or loan large enough to consolidate my debt? Thanks for any help you can provide. – Michael

Hi Michael,

I'm so glad I gave you the motivation necessary to begin fixing your credit issues. Adopting a positive outlook is the best way to start rectifying problems. Without it, you'd be too depressed to do the work.

Here are a few reasons a bright future is in store for you:

Unfettered youth: Because you're still in your 20s, you've got plenty of adult time left to gain control over your money and credit. Use the energy that comes with your age effectively. How? By working as hard and long as you can, spending the bare minimum to get by and aggressively saving cash to go toward your debt. Set an achievable but challenging goal, too — such as you'll put aside $1,000 every month. Any figure that stretches your sprightly muscles will do.

Manageable debt: I know it feels like you owe a tremendous amount, but really it's not that much when you break it down into increments. For example, if you were to send your creditors a grand a month, it would take you less than two years to be in the clear! Your obligations are not a life sentence, but a temporary setback.

Your credit scores: Yeah, that's right — the scores that you have right now. I'm not implying that they're anything worth bragging about. They aren't. However, because FICO scores range from 300 to 850, at least they're above the very bottom. An excellent score is in the mid-700s and up, so make that a target. As your balances decline and you practice responsible borrowing behavior, your scores will rise. When you're debt free and have demonstrated a perfect payment pattern, I guarantee that your numbers will climb.

Interest: No, not the rate your creditors are charging you for unpaid balances, but your own interest in turning this negative situation around. You want to deal with this matter, and that attitude will get you far. But you've got to stay inspired. Don't be surprised when you're tempted to revert into avoidance when toiling or when denial become boring or difficult. Remain conscious of your ultimate desire to live a stable, debt-free existence.

Now for how to go about paying those you owe. Because you've ignored your credit card companies for years, they've either sued you or sold the accounts to a collection agency. You can see which way it went by getting a copy of your credit report from AnnualCreditReport.com.

If you've been sued, make paying off your debt quickly a top priority, as costly fees are being added to the balance. If you can't pay in full immediately, propose a payment plan. They may not accept your offer and instead come back with their own plan, but do not accept a payment plan that you cannot afford and try to negotiate a payment amount that will not set you up for failure down the road.

On the other hand, if your accounts have been sold to collection agencies, you may be able to settle for less than the amount due. There could be a tax consequence (forgiven sums over $600 are considered income), though, and your credit rating won't recover as well as it would if you pay the debts off completely. There's no real advantage in telling your creditors about your drug addiction in the negotiation process. They'll want to know how much you can afford to pay in a lump sum — not about why you accumulated the debt.

As for the student loans, it sounds as if you may be current with them, which is fantastic. Keep them in fine standing by paying on time. Because student loans have comparatively low interest rates, make the smallest expected payments until your other debts are deleted, after which you can send more. If you're not current on them, contact the lender to find out how to bring your loans up to date.

However, don't count on consolidation loans to help you out. Your credit isn't good enough to get a big enough loan to cover your debts. Even if you did find a bank that lend to you, chances are the interest rate would be high, so you'd be charged too much in finance fees to make it worth your while.

Oh, and about your struggle with drugs: Avoid discussing it with creditors. It's not relevant to them and won't help your case. To your friends, family members — and me? Go ahead and talk. I wish you enduring sobriety and financial success.

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